The Foreign Service Journal, February 2012

34 F O R E I G N S E R V I C E J O U R N A L / F E B R U A R Y 2 0 1 2 duction. However, the deduction in- cludes only the unreimbursed trans- portation, storage and travel costs of moving your possessions and yourself and your family to the new location; it does not include meals. Medical expenses (including health and long-term care insurance, but not health insurance premiums deducted fromgovernment salaries) are subject to a threshold of 7.5 percent of Adjusted Gross Income. Thismeans that to be de- ductible, the medical cost would have to exceed $2,250 for a taxpayer with a $30,000 AGI. There is no reduction of itemized deductions for higher income taxpayers for 2011. State and local income taxes and real estate and personal property taxes re- main fully deductible for itemizers, as are charitable contributions to U.S.-based charities for most taxpayers. Donations to the AFSA Scholarship Fund are fully deductible as charitable contributions, as are donations to AFSA via the Com- bined Federal Campaign. Individuals may also dispose of any profit from the sale of personal property abroad in this manner. For 2011 tax returns, any interest paid on auto or personal loans, credit cards, department stores and other personal interest will not be allowed as itemized deductions. If such debts are consoli- dated, however, and paid with a home equity loan, interest on the home equity loan is allowable. Interest on educational loans will be allowed as an adjustment to gross income. Mortgage interest is still, for the most part, fully deductible. In- terest on loans intended to finance in- vestments is deductible up to the amount of net income from invest- ments. Interest on loans intended to fi- nance a business is 100-percent deduct- ible. Passive-investment interest on in- vestments inwhich the taxpayer is an in- active participant (i.e., a limited partner- ship) can be deducted only from the in- come produced by other passive activi- ties. Interest on loans that do not fall into the above categories, such as money borrowed to buy tax exempt securities, is not deductible. Home Leave Expenses Employee business expenses, such as home leave and representation, may be listed as miscellaneous itemized deduc- tions and claimed on Form2106. In ad- dition to the 2-percent floor, only 50 percent for meals and entertainment may be claimed (100 percent for unre- imbursed travel and lodging). Only the employee’s (not familymembers’) home leave expenses are deductible. AFSA rec- ommends maintaining a travel log and retaining a copy of home leave orders, which will help if the IRS ever questions claimed expenses. It is important to save receipts: with- out receipts for food, a taxpayer may deduct only $45 to $58 a day (depend- ing on the federal meals-and-inciden- tals per diem rate at the home leave ad- dress), nomatter how large the grocery or restaurant bill. Lodg- ing is deductible, as long as it is not with friends or relatives, or in one’s own home. The IRS will disallow use of per diem rates and any expenses claimed for family members. If a hotel bill indicates double rates, the single room rate should be claimed; and, if possible, the hotel’s rate sheet should be saved for IRS scrutiny. Car rental, mileage and other unre- imbursed travel expenses, including parking fees and tolls, may be deducted. The rate for business miles driven is 51 cents per mile for the first half of 2011 and 55.5 cents for the second half. Those who use this optional mileage method need not keep detailed records of actual vehicle expenses. They must, however, keep a detailed odometer log to justify the business use of the vehicle and track the percentage of business use. This op- tional mileage method applies to leased vehicles, as well. Official Residence Expenses SinceOct. 1, 1990, employees who re- ceive official residence expenses have not been allowed to reduce their reportable income by 3.5 percent. The IRS ruling regarding ORE states that “usual ex- penses,” defined as 3.5 percent of salary, are not deductible. Therefore the only expenses that are deductible are those above the 3.5 percent paid out of pocket. Employees should save receipts for any out-of-pocket expenses associated with their representational duties. These ex- penses can be deducted as miscellaneous business ex- penses. Home Ownership Individuals may deduct interest on up to $1 million of acquisition debt for loans secured by a first and/or second home. This also in- cludes loans taken out for major home improve- ments. On home equity loans, interest is deductible on up to $100,000, no mat- ter how much the home cost, unless the loan is used for home improvements, in which case the $1 million limit applies. The $100,000 ceiling applies to the total of all home equity loans you may have. The same generally applies to refinancing a mortgage. Points paid to obtain a refi- A F S A N E W S JOSH